Retirement Investors Flock Back to Stocks

May 22, 2014

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Retirement investors are
putting more money into stocks than they have since markets were slammed by the
financial crisis six years ago.

Stocks accounted for 67%
of employees' new contributions into retirement portfolios in March, according
to the most-recent data from Aon Hewitt, which tracks 401(k) data for 1.3
million people at large corporations.

That is the highest percentage
since March 2008, when stocks were teetering under the weight of mounting
mortgage defaults, and compares with 56% in March 2009, when the market hit
bottom.

The rising deposits,
combined with the powerful bull market that took the Dow Jones Industrial
Average to a record high on Wednesday, have left retirement savers with their
biggest exposure to stocks in more than six years. In March, stocks made up 66%
of the assets in the 401(k)s surveyed by Aon Hewitt, up from 48% in February
2009.

The stock crash deeply
scarred investors, and even after the bull market began, they stuck with
low-yielding bonds for the better part of three years.

It took last year's
rally—with the S&P 500 soaring 32%, including dividends—and signs of an
improving economy to coax them back to stocks in significant numbers.

"What cash I have,
I'm going to use to buy more if the market dips," said Roy Chastain, a
68-year-old retiree in Sacramento, Calif., who put an extra 10% of his
retirement account into stocks in September, bringing his total stock
allocation to 80%.

Mr. Chastain, who had put all
his retirement assets into cash in May 2008, has gradually rebuilt his
stockholdings.

Individual investors,
notorious for mistiming the market, didn't fare well in the financial downturn.
At the stock market's peak in October 2007, investors put 69% of new 401(k)
contributions into stocks, according to Aon Hewitt. The S&P 500 went on to
lose 57% of its value by March 2009.

Some financial advisers now
worry that retirement investors could be late to the game, pouring into stocks
after much of the easy gains have already been had. This year, the S&P 500
is 1.9% higher, but it is 0.4% off its record high hit at the beginning of
April. By comparison, in the first four months of last year, the S&P 500
was 11% higher.

Meanwhile, large
investors such as pension funds, banks and insurance companies are showing less
appetite for risk. Demand for shares of newly public companies has weakened,
and utilities, considered safe when economic growth isn't robust, are the
best-performing group this year.

Some individual investors may
have largely forgotten the pain from the 2008 downturn, which caused many of
them to panic and sell at market lows.

"People say that
they're risk-tolerant as long as they're making money, but once they're losing
money, they discover they weren't so risk-tolerant after all and sell
stocks," said Wade Pfau, a professor of retirement income at the American
College in Bryn Mawr, Pa.